- 101 -
benefits would have been too great.23 The nontax benefits of
holding and selling Kannex's share of the notes would be shared
in the same ratio as the costs associated with that share, but,
in all events, these benefits would necessarily be less than the
costs.
If the section 453 investment strategy was economically
justifiable in part on the basis of expected pretax returns, and
the partners understood that Colgate, as the beneficiary of the
strategy, would bear virtually all transaction costs, then the
strategy must have provided Colgate a realistic possibility of
recovering these costs for the section 453 investment strategy to
be deemed profitable. We examined the proposition that Colgate
could reasonably have expected to recover the transaction costs
of the strategy through cash flows from the LIBOR Notes, and we
now set forth our analysis with respect thereto.
Colgate's return was a function of two variables. First,
the credit quality of the issuers of the LIBOR Notes could have
affected Colgate's returns. The possibility of benefitting from
23 The BOT Notes had a tax basis of $104.467 million. Even
if we assume that interest rates rose by 500 basis points,
causing an increase in the cost to acquire Kannex's interest in
the notes from $20.955 million ($25.361 million x .8263) to
$29.283 million ($35.439 million x .8263) and a decrease in the
taxable loss recognizable on the sale of Kannex's interest in the
notes from $66.842 million (($104.467 million - $23.574 million)
x .8263) to $58.622 million (($104.467 million - $33.521 million)
x .8263), each $1 that Colgate paid to acquire Kannex's interest
would still produce more than $2 of taxable losses.
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